Dollar Weakens as U.S. GDP Growth Slows in First Quarter

The dollar fell to the lowest level against the euro in nearly two months after U.S. economic growth in the first three months of this year was weaker than expected, increasing the likelihood that the Federal Reserve will delay raising interest rates.

The U.S. gross domestic product, which measures goods and services produced across the economy, grew at a 0.2% seasonally adjusted annual rate in the first quarter, the Commerce Department said Wednesday. In the fourth quarter of last year, the economy expanded at a 2.2% pace and 5% in the third quarter.

Economists had predicted growth of 1% in the first quarter of 2015.

In response, the dollar dropped against the common currency to its lowest level since March 5, with one euro buying as much as $1.1075, compared with $1.1011 ahead of the data. The dollar recently traded 0.4% lower against the euro, with one euro buying $1.1025. The dollar dipped to ¥119.17 against the Japanese yen, from ¥119.30 beforehand, but was still trading up 0.2% on the day.

The GDP reading follows a recent raft of soft indicators, including those for retail sales, business investment and manufacturing output, that have prompted investors to shed some of their bets on a stronger dollar.

The data likely pushes market expectations for higher interest rates back into late 2015 and early 2016, said Scott Smith, senior market analyst with Cambridge Global Payments, which handles currency hedging for corporations.

“Today’s GDP number, though backward looking, still reinforces the Fed’s stance of caution on the economy and its outlook on interest rates,” Mr. Smith said. “The dollar’s path will be data-dependent in the coming months. So we’re unlikely to see a shift in the dollar from its lower trajectory until the data turns around.”

The Federal Reserve has said it would raise interest rates when it is more certain that the U.S. economy is on firmer footing. Higher rates would make the dollar more attractive to investors, as they would increase returns on assets denominated in the U.S. currency.

The first quarter report showed consumer spending increased 1.9% in the first quarter, slowing from a 4.4% pace at the end of 2014. Consumer spending comprises more than two-thirds of U.S. economic output.

Economists said the GDP growth miss was due to an unusually strong winter, disruptions at West Coast ports and the effect of the stronger dollar on exports. Many currency strategists expect the dollar to continue to strengthen over the second quarter as the economy rebounds.

Later Wednesday, the Fed will issue a statement from its two-day monetary-policy meeting which investors will peruse for signals on the economy and when the central bank may raise interest rates. The Fed last raised short-term, benchmark interest rates in June 2006.